Spin-off stocks have been described as one way to find names that will move against a downtrending market, but that doesn’t mean that we can just throw money at them and consistently make money.

Harking back to Gerald Loeb’s admonition that you need a reason and a move before entering a position, yes, stock spin-offs do provide a reason, but the move has to present itself.

Remember that 80% of stocks move along with the overall market. If you are going to enter a situation in which you know that 4 out of 5 stocks are going to follow the trend down, you’d better let the price and volume to come to you.

You can decide when that move is happening in a number of ways and the one you choose is up to you. There are several ways to go, ideally you can find one that makes sense to you and that is clear enough that you can do use it consistently.

Tags: spin-off stocks, trend, Value Investing

ITT Corporation has announced that it intends to use a stock spin-off process to separate the company into three parts:  water technology, defense technology, and the rest of ITT that will be left with those two off on their own.

The is no lack of coverage or awareness of this or most other stock spin-offs now.  Perhaps there was a time when spin-off stocks traveled under most investors’ radars, but that advantage for savvy value seekers has been diluted by websites, blogs, and even highly touted, heavily sold “all-you-to-do-to-beat-the-market” e-books and courses.

The ITT spinoff even has its own website to explain exactly what is going to happen,  http://www.transformationitt.com .  “Three Strong Businesses Positioned to Create Significant Value for Shareholders as Standalone Companies” is apparently their motto.  The pro forma revenues are reported at $3.6 billion from water, $5.8 billion from defense, and $2.1 billion from ITT which they describe as “a diversified global manufacturer of highly engineered industrial products.”  So you and everyone else has more than enough data to get totally bored or confused.

So what’s an individual investor to do?  Other than give up the whole thing, of course.

First off, you can just read the information, draw your own conclusions and make your best estimates of the potential for the parts of the transaction, parent stock and spin-off stock.  That can work quite well actually.  Do you think defense spending will be cut?  Do you think that the world demand for clean water will be a profitable area in the future?  No one has a chart with data on the right hand side that goes beyond today’s date.  Take a deep breath and make your own predictions.  They’re likely to be as good as anyone elses.

As far as I can tell at this point, this spin-off does show signs of being a situation in which the sum of the parts could turn out to be worth more than the whole.

• Though the underlying theme is engineered solutions to complex challenges, each is working in an identifiably different area of application.
• All three entities are in the business of keeping an increasingly efficient flow of limited natural resources flowing to the world’s economies.
• It doesn’t look like the spin-offs are an attempt to dump toxic assets.
• Top executives from the current ITT are going with the new companies.

On the other hand, none of them seems as though it is going to be so different from the current parent company that they will necessarily be automatically dumped by current shareholders creating value that way and they haven’t told us how debt will be apportioned among the three companies.  So, watching, reading, and trying to put it all together is going to be necessary.

Another way to go is to pick some measurable characteristic(s) of the companies’ operations that make sense to you for which you have access to accurate information.

This can take a bit of digging,  but if you find something that others may not be taking into account, it can be well worth the effort.

Ratios can be helpful in this regard because they allow you to compare the data across several companies.  The challenge here is to make an accurate decision about what companies  to compare each component to.   It’s fairly easy to find them for the current configuration in free content on the internet.   For the current ITT  the Morningstar website lists the price/book ratio to be 2.6,  price/sales 1.0, forward Price/Earnings 12.7, and Price/Cash Flow 12.8.  And often, others will even do some calculations for each component of the spin-off for you, especially for the high visibility spin-offs like this one.

Take advantage of those.

As with most stock spin-offs, there is plenty of time to watch the process unfold and decide if, when, and where to enter.  Make the trade come to you.

Tags: ITT, stock spin-off, stock spin-off investing, Value Investing

In a recent article about Hospira, HSP, a 2004 spin-off stock,  the Lake County News-Sun illustrates one of the most direct pathways for a successful trade in a spin-off.

“At least two-thirds of my clients, most of them Abbott retirees, divested their Hospira holdings because Hospira was a new company and they were not certain about it,” said Roch Tranel, president of Tranel Financial Group, a financial planning firm based in Libertyville which has many Abbott retirees as clients.  His clients wanted to stick with Abbott, ABT, the parent company.

They didn’t want the new company’s stock, so they sold it.  And, while they were doing that, with all of its risks, uncertainties, high hopes, and positive potential,  the  new company started its life from our perspective as an excellent candidate for a long position.

20/20 hindsight shows us again that this turned out well.

Of course we don’t have 20/20 foresight, so entering one of these trades when lots of other people are heading for the exits can be a pretty stressful thing to do.

The right side of any chart is simply too empty to evoke feelings of calm.  Managing whatever your own particular level and style of that kind of discomfort is, is as important as finding the right stock to buy and figuring out a high percentage time to get in.   If you were born with a naturally cool head and keen eye for threading your way through uncertainty, count yourself  very lucky.  Most of need some form of trading stress management routine to keep us calm and clear-eyed enough to “pull the trigger” when the time is right.

Tags: Hospira, HSP, spin-off stock, stock spin-off, Value Investing

Dr. Pepper Snapple, DPS,  emerged in its present form as a stock spin-off in May of 2008.  

It has been noted that spin-off stocks often make their best moves in their second year.  This could be taken to suggest that during its first year a spin-off stock is likely to be a good value.

Looking at its chart with 20/20 hindsight, Dr. Pepper Snapple is a spin-off stock that could have been viewed as undervalued to varying degrees during most of its first year.

I believe it is Preston James, a guy who does workshops on trading stocks that have pre-announced higher earnings ahead, who recounts a story in which a man said to him “all I need to know is when to get in and when to get out.”  The story apparently gets a pretty consistent laugh, and yet . . . .  this is it, isn’t it?  When do we get in?  When do we get out?  DPS spent all of its first year lower in price than it is today near the end of its second year.  When “should” you have gotten in?  And when should you get out?

Given that the one thing we know about when this train leaves the station and when it gets to its destination is that it tends to happen when the largest number of riders aren’t prepared, what do we do?  Not really a cute or funny question when it’s your money.

In a general sense, this is a personal, psychological challenge related to how you deal with uncertainty and that is another whole topic.  In its most specific sense, it a challenge of looking for clues, tendencies, correlations, averages; your standard fuzzy types of stuff.

The “second year” observation may have something in it.  Any observations?   thoughts?   ideas?

From Yahoo Finance:  ”Dr Pepper Snapple Group, Inc. operates as a brand owner, manufacturer, and distributor of non-alcoholic beverages in the United States, Canada, Mexico, and the Caribbean. It offers flavored carbonated soft drinks (CSDs) and non-carbonated beverages (NCBs), including ready-to-drink teas, juices, juice drinks, and mixers.”

Tags: DPS, fear, greed, investing, psychology, psykchological, spin-off stock, Value Investing

The concept of seeking value is familiar to anyone who shops for groceries, but when it comes to value investing, carrying those learnings over can be deadly.

The grocery store makes it easy because it’s all right there.  From toilet paper to apples if you want to take the time you can calculate, prod, read, and decide which product has the best value for you.  And anyway, if that new brand that seemed to be such a deal isn’t, you’ll be going back to restock soon anyway.

Now turning to stocks, we want to buy low and sell high.  We want  to find stocks that are likely to go higher than they are now so that we can sell them and make money.   One way to do that is to find a stock that is a bargain, one that has good value.

The thing is, it can be very difficult to tell the difference between true value,  a stock whose price is low by the usual backward looking measures, but is actually priced just right going forward,( in other words one that is down there for good reason), and one that is irrationally, mistakenly, or unfairly undervalued.

Of course it is the latter that we value investors are looking for and spin-off stocks are a great place for find real value;  stocks whose price is depressed for reasons unrelated to the company’s prospects.  In Joel Greenblatt’s language, this is a pond into which we want  to throw our bait in hopes of hooking a big one.

Tags: spin-off stock, stock spin-off, value, Value Investing

Stock spin-offs are supposed to be part of what is called value investing, but what the heck is that really?

I know, I know, it’s finding stocks that are actually worth more than the market thinks they are and buying them before everyone else finds out. Then we sit back and pray that we don’t find out that everyone else knew all along that in fact the market had it right all along, but rather is going to find out just in time for us to sell our stake to them.

Fair enough and these situations do happen, but we are talking money here and to other participants in the marketplace aren’t dummies.

It is a pretty tall order to find mis-priced merchandise when you are up against the stockpicking equivalents of Michael Jordan, Peyton Manning, and Joe DiMaggio every day, but we are trying to do exactly that. And, as the old cartoon character Snagglepuss used to say “And don’t you forgit it!”

I think that a better definition of value investing ought to include finding corners of the marketplace where the very smart, very savvy, very tough superstars either aren’t allowed to work or where it is not worth their time to work and, hopefully, where we actually have an edge.

Everyone, including short sellers, is trying to buy low and sell high.

Tags: stock spin-off investing, Value Investing

The recently announced stock spin-off by Walter Industries (WLT) of its financial/home building unit by has a unique twist to it and this one is attracting attention for the parent’s potential for coming out ahead more than the spun off company. (Though I wonder if this isn’t a home builder that has simply been caught in a downdraft that it is likely to come out of it strong and growing.)

The company started in the home building business in 1946. Jim Walters built and sold one house. Today they build houses on the buyer’s land in 12 states across the southern United States and, until recently they financed the purchase often using the buyer’s land as the collateral for loan. Going forward they will be using third party mortgages, and they are closing a number of sales offices, but they are still in the housing business and apparently are quite good at it.

So why are they spinning off the housing and what are they spinning it off from?

Even though the company started in home building, what it is now best known for is metallurgical coal.

A case can be made that given its position in the steel industry and steel’s outlook in the intermediate and longer term, Walter’s share price is very depressed and ripe for a strong spring back.

WLT, Walter Industries, certainly looks like it belongs on a value investing watchlist.

Tags: spin-off stock, stock spin-off, Value Investing, Walter Industries, WLT

Looks like IAC’s spin off of Tickemaster (TKTM) came just in the nick of time. Barely out of the box, the new company lost an account that provided about 6% of their business and the stock dropped 17%.

Spin offs, IPO’s, price/earnings, price/book or any other single screening tool can be a big help, but they just tell you where you are likely to find winners. What any given stock’s price will do on any given day is unknown until it does it.

We learned that one here, big time.

And, while the professors may be able to put all the spin offs into their computers and crunch the numbers, most of us can’t buy all of them. We have to choose. Hopefully, we choose well and do better than the average for the group. Hopefully, we have risk management tools at the ready and we limit our losses. However you look at it though, one Ticketmaster or, God forbid, Lehman Brothers, can take the shine off a portfolio for quite a while.

Tags: risk management, stock spin-off, Ticketmaster, TKTM, Value Investing

Chesapeake Energy is planning a stock spin-off of its midstream natural gas operations. Apparently they haven’t said exactly what they are going to do or in what form it will occur. What they did say was that it was intended to “extract value from assets”, whatever that means.

Whether this will result in an attractive investment remains to be seen. I guess it is back to the old Joel Greenblatt question of what’s in it for whom. For that, as always, we are going to have to read their official filings of just exactly what they are going to do.

On the surface of it, midstream operations can provide good cash flow and stability since owning the pipes and storage and delivery facilities means you collect your fees no matter what the stuff going though them is costing at the moment. If you don’t screw it up, you should be able to keep cashing the checks for a long time. That should be good.

Will we get a chance to get in on this stock spin-off at a good price? Only time will tell.

At the moment, I can’t see why the new company should be undervalued out of the box. Maybe just size or energy investors not really wanting to be in the midstream part of the business will cause them to unload the new shares. Maybe if it comes out at an MLP that structure will depress the early prices. Who knows? Keep watching.

As so often happens, maybe I’m missing something. Read the story about the Chesapeake Energy stock spin-off plans.

Tags: CHK, mlp, stock spin-off, stock spin-off investing, Value Investing